Oil and gas industry ‘definitely not happy’ with changes to frack tax proposal

The state’s revised oil-and-gas severance tax bill “creates a lot of problems,” one of the industry’s top lobbyists says.

Ohio’s top two oil and gas industry groups are miffed at the changes introduced Wednesday evening to House Bill 375. Tom Stewart, executive vice president of the Ohio Oil and Gas Association, and Chris Zeigler, executive director of API Ohio, formerly the Ohio Petroleum Council, both pointed out what they see as big problems with the bill.

Together, both groups represent most of the drillers operating in the state – Stewart the independent drillers and Zeigler the big corporations.

House Bill 375’s proposed severance tax on natural resources taken from horizontal wells has increased to 2.25 percent, up from 2 percent as originally proposed in the bill. The revised bill also does not exclude the industry from paying the state’s 0.26 percent commercial-activities tax, unlike the original version. And the bill shortens the initial tax rate of 1 percent that drillers would pay from five years to two. Horizontal wells tend to have very high initial production in the beginning years before tapering off.

It’s those changes that have the industry groups worked up. At Wednesday evening’s hearing at the Statehouse, which was filled with oil and gas industry representatives, some muttered under their breath and looked visibly angry as legislators discussed the bill.

Stewart told me Thursday that the changes, especially the CAT tax, could be enough to affect the industry’s growth in the state. He decried the plan to tax the industry at eight times the CAT tax rate, then make them pay both.

“Why put that on us too? It’s not fair. We’re only investing billions into this thing. Billions.”

Ohio Gov. John Kasich last month said the bill needed to make sure taxpayers got fair value for oil and gas companies depleting the state’s natural resources. Kasich’s severance-tax plans of 4 percent and up proposed last year were denied by his fellow Republicans in the legislature.

House Ways and Means Committee Chairman Rep. Peter Beck, R-Mason, said at the hearing that Kasich’s office had pushed for a 2.75 percent compromise in the substitute bill. When asked if the governor would sign the bill, spokesman Rob Nichols said, “We continue to discuss the issue with legislative leaders so they are well aware of where the governor is on the issue. But we don’t engage in those discussions through the press.”

Zeigler of API Ohio said he’s “definitely not happy,” especially with the shortening of the initial tax rate of 1 percent. API Ohio previously had no public stance on the severance tax bill.

One portion of the bill, modeled after Illinois law, gives the state’s tax commissioner the option to determine the market price of oil or gas sold to purchasers if the commissioner determines the price is too low. This appears to be an attempt to make sure that friendly or interlinked companies don’t undersell their product to avoid the taxes, but Zeigler thinks it could negatively impact his member companies.

“I don’t understand why you would want to emulate a state like Illinois that doesn’t have hydraulic fracturing and doesn’t extract natural gas of any amount like Ohio,” he told me.

The tax rate shortening could impact drillers because the “vast majority of wells” will take five or six years until they recover costs, Stewart said. Some wells in eastern Ohio’s Utica shale play are in the “sweet spot,” but most aren’t, Stewart said.

“You cannot make statewide tax policy based on four or five wells in Harrison County,” he said. “If you do, you will discourage development. We have to decide if we want this play to flourish, or are we only going to focus on a couple of townships?”

The state’s severance tax would still be low compared with other states, although because of various taxes in each state it’s not always an apples-to-apples comparison. While neighboring Pennsylvania and its Marcellus shale play does not have such a tax, drilling giant Texas has a 7.5 percent tax. Kentucky has a 4.5 percent rate.